Is Harvia Oyj's (HEL:HARVIA) Balance Sheet Strong Enough To Weather A Storm?

Harvia Oyj (HEL:HARVIA) is a small-cap stock with a market capitalization of €127m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HARVIA here.

How much cash does HARVIA generate through its operations?

Over the past year, HARVIA has reduced its debt from €83m to €40m – this includes long-term debt. With this reduction in debt, HARVIA's cash and short-term investments stands at €8.3m , ready to deploy into the business. Moreover, HARVIA has produced cash from operations of €8.8m over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that HARVIA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HARVIA’s case, it is able to generate 0.22x cash from its debt capital.

Does HARVIA’s liquid assets cover its short-term commitments?

With current liabilities at €12m, the company has been able to meet these obligations given the level of current assets of €36m, with a current ratio of 2.94x. For Leisure companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is HARVIA’s debt level acceptable?

With a debt-to-equity ratio of 61%, HARVIA can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether HARVIA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HARVIA's, case, the ratio of 4.4x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HARVIA’s high interest coverage is seen as responsible and safe practice.

Next Steps:

HARVIA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HARVIA's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HARVIA's financial health. Other important fundamentals need to be considered alongside. You should continue to research Harvia Oyj to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for HARVIA’s future growth? Take a look at our free research report of analyst consensus for HARVIA’s outlook.
2. Valuation: What is HARVIA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HARVIA is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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